Mortgage rates are definitely something you need to watch in 2022. But what’s going on with mortgage rates and what can we expect to happen throughout the rest of the year?
Here’s everything you need to know:
What Are Mortgage Rates in 2022?
Mortgage rates in 2022 have risen faster than expected. At the beginning of this year, the average mortgage rate for a 30-year fixed-rate conventional loan was right around 3.3%. By the beginning of February, the average rate was about 3.75% for the same loan type and term. At the end of February, the average rate is now over 4.0% for the first time since 2019.
Why Are Mortgage Rates Rising?
As you can see, mortgage rates are rising rapidly, but why? The Federal Reserve has maintained low interest rates between 0% to 0.25% since the beginning of the pandemic. These low rates were designed to stabilize the national economy in a time of economic downturn caused by pandemic-related shutdowns.
Now that we finally seem to be exiting the pandemic, the Federal Reserve is planning to make several rate hikes in 2022 to combat inflation as the economy recovers. And even though the Fed hasn’t increased rates yet, lenders are pricing these increases into their current rates.
Will Mortgage Rates Keep Rising?
While it’s impossible to say what will happen with mortgage rates throughout the course of the year, it’s generally expected that mortgage rates will keep rising. Experts initially predicted interest rates around 4% by the end of the year, but rates have hit 4% within just a couple of months. As a result, it’s definitely worthwhile to jump on these lower rates while you still can.
How Will Rising Mortgage Rates Impact the Real Estate Market?
There’s no doubt that rising mortgage rates will impact the real estate market that has been hypercompetitive in recent years. For now, rising rates will force many homebuyers to move quickly to purchase a home sooner rather than later to secure a better rate. It will also price many potential buyers out of the market since rising mortgage rates decrease purchasing power.
While you may not be able to control rising mortgage rates and the resulting impact on the market, there are some things you can do to deal with rising mortgage rates and obtain the lowest rate possible:
1. Shop Around With Different Lenders
For starters, you should always shop around with different lenders when you’re looking for a mortgage. Experts recommend that you get offers from three to five different lenders. Experts also recommend that you get offers from a range of different types of lenders, including big banks, local lenders, online lenders, and alternative lenders like Vaster.
If you don’t want to do all this rate shopping on your own, then you should consider working with a mortgage broker that acts as the middleman between you, the borrower, and different lenders. Mortgage brokers give you access to a wide range of different lenders that offer different rates and might be able to negotiate a lower rate on your behalf.
2. Lock in Your Rate Now
Once you’ve shopped around and are confident that you have found the best possible rate, you should lock it in as soon as possible in the event that rates keep rising as expected. Some lenders don’t allow you to lock in your rate until you’re under contract on a property, whereas others will allow you to “lock and shop.”
This option allows you to lock in a low rate now while you shop for a home since it can take a considerable amount of time for an offer to be accepted on a property in such a competitive market. However, most lenders that offer a “lock and shop” option do so for a fee and for a specific period of time that’s usually between 90 and 180 days.
3. Buy Down Your Rate
If you’re still not able to get the mortgage rate you want, you could still obtain a lower rate by buying down your rate using discount points. With discount points, you typically have to pay 1% of the loan amount in exchange for an interest rate that’s 0.25% lower.
For example, if your loan amount is $300,000 and you were initially offered an interest rate of 4.25%, you could pay $3,000 for a single discount point that will drop you down to a 4.0% interest rate.
Before you decide to buy down your rate, you first need to run some calculations to make sure that it would actually be worthwhile. So if you had that $300,000 mortgage and were paying $3,000 for a 4.0% interest rate, you would be saving about $44 per month compared to an interest rate of 4.25%.
This means that it would take you about five and a half years for you to recoup the $3,000 you spent to buy down your rate. If you plan on staying in your home for longer than that, then it would be worthwhile. However, if you don’t plan on staying for that long, then you may want to just keep your rate at 4.25%.
4. Improve Your Credit Score
Another way that you can counter rising mortgage rates is to improve your credit score and lock in a lower rate. So let’s say that you have a great credit score that’s over 760, and you’re able to qualify for a very competitive interest rate of 3.285%, the national average mortgage APR as of this month.
On the other hand, if you have a lower interest rate closer to 660, you’d likely receive an interest rate of around 4.328% APR based on the national average. And while just over a 1% difference may not seem like a lot, it has a huge impact on your purchasing power, monthly payment, and total interest paid.
For instance, if your 30-year mortgage loan is $400,000 and your interest rate is 3.285%, your monthly payment with principal and interest would be about $1,749. With an interest rate of 4.328%, your monthly payment would be about $200 higher at $1,986 with just principal and interest.
And over the 30-year term of your mortgage, you would pay just under $230,000 in interest with a 3.285% rate compared to paying nearly $315,000 in interest with a 4.328% interest rate — an $85,000 difference.
5. Put More Money Down
If you’re able to, you may also want to consider putting more money down to deal with rising mortgage rates. When you put more money down, you borrow less. This means that you pay less in interest, and higher interest rates won’t impact you as much.
So let’s say that you’re purchasing a $450,000 house and decide to put down the minimum amount of 3% required for conventional loans. With a down payment of $13,500, your loan amount would be $436,500.
Now let’s say that you have a 30-year fixed conventional mortgage with a rate of 4%. Your monthly payment with principal and interest would be around $2,084 per month. You would pay a total of $313,000 in interest over the term of your loan.
However, if you decide to put 20% down on your $450,000 house for a down payment of $90,000, that only leaves you with a loan amount of $360,000. With the same mortgage rate and term, your monthly payments would be around $1,719 with principal and interest. Then, you would pay $259,000 in interest over the term of the loan.
6. Refinance Your Loan
If you’re already a homeowner and are looking to take advantage of relatively low mortgage rates before they get even higher, then you should definitely consider refinancing your loan. Today’s average rates are around 4.160% APR for a 30-year fixed refinance and around 3.440% APR for a 15-year fixed refinance.
So let’s say that you purchased your home in 2018 when the average mortgage rate was around 4.54%. If you were to refinance today at the current 15-year fixed refinance rate of 3.440%, you would lower your interest rate by over 1%.
In most cases, experts say that if you’re able to lower your interest rate by at least 1%, then it’s worthwhile to refinance so long as you plan on staying in the home for a few years to recoup your closing costs.
7. Consider a Different Loan Term
As you can see with those refinance rates, choosing a different loan term could also help you get a lower interest rate. According to NerdWallet, the average national average interest rate for a 30-year fixed-rate loan was 3.933%, with an APR of $4.009%.
Meanwhile, the national average interest rate for a 15-year fixed-rate loan was 3.088%, with an APR of 3.226%. Furthermore, the national average interest rate for a 20-year fixed-rate loan was 3.661%, with an APR of 3.770%.
This means that for a $400,000 30-year fixed-rate loan, you would pay around $1,894 per month with principal and interest, around $2,353 per month for a $400,000 20-year fixed-rate loan, and around $2,806 per month for a $400,000 15-year fixed-rate loan.
While your monthly payments may be higher, it’s important to consider the potential savings. The 30-year loan would result in paying $282,000 in interest, the 20-year loan would result in paying $165,000 in interest, and the 15-year loan would result in paying just over $100,000 in interest.
8. Consider a Different Loan Type
Last but certainly not least, you could consider choosing a different loan type to combat rising mortgage rates. For example, you could choose an FHA loan with an average APR of 3.835% or, if you qualify, a VA loan with an average APR of 3.566%.
Another option comes in the form of a bridge loan. A bridge loan is designed to bridge the gap between closing on a property and securing financing that can be difficult when rates start to rise. Bridge lenders like Vaster tend to be more flexible and efficient than traditional lenders and are willing to work with borrowers with unconventional finances, including foreign nationals.